Boom vs Bust

In any market, booms and busts follows each other in a cycle: boom, bust, boom, bust, boom, bust, boom.

Where are we right now? Where are we in the market you trade?

The steps in the above picture might be slightly different but the rules are simple to understand.

When there are good jobs, confidence grows. If people confident, they spend more. If they spend more the inflation increases so the central bank is "forced to" increase interest rates.

Higher interest means that harder to get a loan on an apartment and what is more important: harder for companies to finance projects, new start ups. Even day to day operations of companies depend on short-term loans. So higher interest rate is like a brake on companies (they call it "brake on economy"). Share prices become less valuable as the companies worth less. Many companies need to close down. High unemployment. Low confidence is the result.

Even people who would have money to invest are not confident so they keep their money in gold or they protect it otherwise.

Many people believe that economy controls interest rates. I think it is the opposite. Central banks use interest rates to control economy.

So now it is easy to understand while certain news releases are vital to follow during our investments. When the government comes out with unemployment rates, it is an indicator of consumer confidence. Governments even measure consumer confidence and they release that information regularly.

If such news is greatly different from the expectations: it might have an immediate (meaning within seconds) or long-term impact on your trades.

http://www.oanda.com has a service that maps the impact of news releases on currency price changes. This provides a good insight into the impact of releasing fundamental data to our trading.